REGULATORY

FRAMEOWRK
FOR INBOUND
M&A IN INDIA
Assignment 1

ABSTRACT
A foreign entity can invest in India through: FDI or
Foreign Direct Investment or through FPI or Foreign
Portfolio Investment

Arun Maithani
M&A

Assignment 1
Regulatory framework for inbound M&A by a Foreign Entity
In an increasingly globalized world, Mergers & Acquisitions (M&A) are assuming tremendous
significance with several corporations seeing consolidation as a quick and effective growth strategy.
Indian companies have traditionally been attractive targets for acquisition by international companies.
A foreign entity can invest in India through;
FDI or Foreign Direct Investment
FPI or Foreign Portfolio Investment
Foreign Investment

Foreign Direct
Investment

Foreign Portfolio
Investment

Foreign Venture
Capital Investment

FIIs
Automatic Route
Government Route

SEBI
Regd.
NRIs
PIOs

1) Foreign direct investment

FDI is investment in equity of the Indian company, it is the long term investment. The Foreign
Investment in India is undertaken in accordance with the FDI Policy which is formulated and announced
by the Government of India.
Types of Instruments to invest in India

Equity shares
Fully Compulsorily and Mandatorily convertible Debentures.
Fully Compulsorily and Mandatorily convertible Preference shares.

Policy and regulatory framework toward FDI

The Government has put in place a policy framework on Foreign Direct Investment, which is embodied
in the Circular on Consolidated FDI Policy. The Department of Industrial Policy and Promotion (DIPP),
Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through
Press Notes/ Press Releases which are notified by the Reserve Bank of India as amendments to the
Foreign Exchange Management Act1.
FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change
in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the DIPP.

http://www.femaindia.in/

RBI

Ministry of
Finance

Ministry of
Commerce
and Industry

FIPB

DIPP

FDI Regulation

FEMA

Entry Routes for Investment in India

Under the FDI Scheme2, investments through two routes:

Automatic Route: Under the Automatic Route, the foreign investor or the Indian company does
not require any approval from the Reserve Bank or Government of India for the investment.
Government Route: Under the Government Route, the foreign investor or the Indian company
should obtain prior approval of the Government of India (Foreign Investment Promotion Board
(FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of
Industrial Policy & Promotion, as the case may be) for the investment.
FDI is not permissible in the following some cases like Atomic energy, Agricultural or
plantation activities or Agriculture (excluding Floriculture, Horticulture), Gambling\Betting etc.

Entry options for foreign investors in India

A foreign company planning3 to set up business operations in India has the following options:
1. Incorporated Entity: By incorporating a company under the Companies Act, 2013 through

Joint Ventures; or
Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the
investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment
(FDI) policy.
2. As an Unincorporated Entity: As a foreign Company through

Liaison Office/Representative Office

Project Office
Branch Office

Such offices can undertake activities permitted under the Foreign Exchange Management
(Establishment in India of branch or office of other place of business) Regulations, 2000.

2
3

https://www.rbi.org.in/Scripts/FAQView.aspx?Id=26
http://www.company-formationindia.com/

2) Foreign Portfolio Investment

FPI is done by foreign institutional investors (FIIs). FII means an institution established or incorporated
outside India which proposes to make investment in securities in India.
What FIIs can do?
A Foreign Institutional Investor may invest only in the following:

Securities in the primary and secondary markets including shares, debentures and warrants of
companies unlisted, listed or to be listed on a recognised stock exchange in India; and
Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed
on a recognised stock exchange or not
Units of scheme floated by a collective investment scheme
Dated Government Securities
Derivatives traded on a recognised stock exchange
Commercial paper
Security receipts
Indian Depository Receipt

FIIs are allowed to trade in all exchange traded derivative contracts subject to the position limits as
prescribed by SEBI from time to time. Clearing Corporation monitors the open positions of the FII/
sub-accounts of the FII for each underlying security and index, against the position limits, at the end of
each trading day.
Regulation of FIIs
The regulations for foreign investment in India have been framed by the Reserve Bank of India and
Foreign Exchange Management Act, 1999 4 . In line with the said regulations, since 2003, the
Securities and Exchange Board of India (SEBI) has been registering FIIs and monitoring investments
made by them through the portfolio investment route under the SEBI (FII) regulations 1995. SEBI acts
as the nodal point in the registration of FIIs.
Who can get registered as FII?
Following foreign entities / funds are eligible to get registered as FII:
Pension Funds, Mutual Funds, Investment Trusts, Banks, Insurance Companies / Reinsurance Company,
Foreign Central Banks, Foreign Governmental Agencies, Sovereign Wealth Funds , International/
Multilateral organization/ agency, University Funds (Serving public interests), Endowments (Serving
public interests), Foundations (Serving public interests), Charitable Trusts / Charitable Societies
(Serving public interests)
3) External commercial borrowing
Any investment other than equity share or that may or may not give an option to the investor to convert
its instrument into equity and which does not involve upfront pricing of the instrument is not termed as
FDI. Rather it is termed as ECB (external commercial borrowing) and has to comply with the ECB
guidelines.

www.sebi.gov.in/faq/fiifaq.pdf

The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along
with Reserve Bank of India, monitors and regulates ECB guidelines and policies. Infrastructure
and Greenfield projects, funding up to 50% (through ECB)5 is allowed. In telecom sector too, up to
50% funding through ECBs is allowed. Borrowers can use 25 per cent of the ECB to repay rupee debt
and the remaining 75 per cent should be used for new projects. A borrower cannot refinance its existing
rupee loan through ECB.
4) Foreign venture capital investments
A Foreign Venture Capital Investor (FVCI)6 is an investor incorporated or established outside India
who can invest either in a Domestic Venture Capital Fund or a Venture Capital Undertaking (Domestic
Unlisted Company). Foreign equity player or Foreign Venture can also invest in India directly
under FDI Scheme subject only to SEBI Regulation and sector specific caps.
The registered foreign venture capital institutions can invest through:

Equity, equity linked and debt instruments through an initial public offer or private placement.
Can also invest in securities on recognized stock exchange.

The Reserve bank of India in 2012 allowed FIIs registered with SEBI to invest in eligible securities
through private arrangement or purchase from third party. This has enhanced the investment flexibility
available to the foreign venture capital institutional investors. The service sector, information
technology sector along with telecommunication sector have shown great interest from FIIs side and
have garnered maximum investments.
Benefits of Registering under the FVCI Regulations
SEBI has given certain benefits to the investors who are registered as an FVCI.

FVCI instead of paying a price based on the net asset value of the investee company could pay
by negotiable price (acceptable to the buyer and the seller/issuer.).
The shares acquired by FVCI in an unlisted company are not subject to the one year lock-up
period upon the Initial Public Offering (IPO) of the shares of the company.
FVCIs registered with the SEBI are Qualified Institutional Buyers in the SEBI. Thus they are
eligible for subscribing for the securities in an IPO under the typical book-building process.

Certain restrictions are also imposed on use of funds for those who register as an FVCI.

5
6

Foreign Venture Capital Fund is required to submit a quarterly statement in the prescribed
format. Every venture capital fund shall maintain, for a period of eight years, books of account,
records and documents.

Wikipedia
http://www.helplinelaw.com